Explain how losses of existing firms are reduced as some firms ...

[tuffie]

Explain how losses of existing firms are reduced as some firms exit a monopolistically competitive industry due to economic losses.

Question 2

Which of the following statements about Coasian reasoning is true?
 a. Coasian reasoning lacks symmetry, it does not provide a starting point for negotiations toward an efficient outcome.
  b. Coasian reasoning emphasizes on the benefits received by the person having more rights compared to the others in the group.
  c. Coasian reasoning explains how the costs and benefits of a transaction are distributed among the parties.
  d. Coasian reasoning provides a starting point for negotiations toward an efficient outcome, if the cost of negotiation is low.

[cloudre37]

Answer to Question 1

As some firms exit, it means fewer firms in the market, which increases the demand for the remaining firms' product, shifting their demand curves to the right. When firms exit not only will the firm's demand curve move outward but it also becomes relatively more inelastic due to each firm's products having fewer substitutes. The higher demand results in smaller losses for the existing firms until all losses finally disappear where the ATC curve is tangent to the demand curve.

Answer to Question 2

D